here - Boston Bar Association

Judith G.H. Edington
Russell J. Stein
Boston Bar Association
Tax-Exempt Fundamentals
October 9, 2012
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State statute controls formation.
◦ Generally is an entity organized under a state
statute or common law of trusts.
◦ In Massachusetts, non-profit corporations are
organized under MA G.L. ch. 180.
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No prohibition from making a profit.
◦ If a non-profit spends more then it brings in, it will
have difficulty surviving, therefore “profit” is
generally a necessity.
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Tax-exemption is determined under IRS
rules.
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For-Profit
Non-Profit
Has owners who hold equity in the
entity.
Generally does not have “owners”
(although may have “members”).
Operated for the benefit of its
shareholders / owners.
Operated for the benefit of its
“charitable class.”
Legally able to generate a profit.
Legally able to generate a profit.
Profits passed on to its owners.
Profits cannot pass on to any
owners or members.
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Non-profit organizations are also sometimes
referred to as tax-exempt organizations.
Many non-profit organizations benefit from
tax exemption but are not charitable
organizations.
◦ Some of the better known of these include
 Labor organizations – 501(c)(5)
 Business leagues -- 501(c)(6)
 Social clubs – 501(c)(7)
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Non-profit orgs
All tax-exempt orgs
Social welfare orgs
Eligible to
receive taxexempt gifts
Charities
Source: Bruce Hopkins, The Law of TaxExempt Organizations, 8th Ed. P. 6
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A 501(c)(3) organization is one that is
organized and operated for one or more of
the following exempt purposes:
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Religious
Charitable
Scientific
Testing for public safety
Literary
Educational
Prevention of cruelty to children or animals
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◦ Both are 501(c)(3) charitable organizations.
◦ Private foundation is the default 501(c)(3)
classification.
◦ An organization has to “earn” public charity status.
 broad public financial support -- e.g. American Red
Cross, United Way, Boston Symphony Orchestra
 status based – e.g. school, hospital, church
◦ Why does it matter?
 public charities enjoy more favorable rules with
respect to the charitable income tax deduction
 private foundations are subject to a strict code of
behavior not applicable to public charities
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Primary Purpose Test
◦ Organization must be organized and operated exclusively
for an exempt purpose.
 “Exclusively” has been interpreted as “primarily.”
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Organizational Test
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Operational Test
◦ Organization’s formation documents must set out
charitable purpose.
◦ Assets must be dedicated to an exempt purpose. Upon
dissolution, assets must be distributed in furtherance of
exempt purpose.
◦ Must engage primarily in activities that accomplish one or
more of its exempt purposes.
◦ Will not meet the test if more than an insubstantial part of
its activities is not in furtherance of an exempt purposes.
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Charitable assets must be used for the
benefit of the public and not for any
particular private use.
◦ No “private inurement.” No income or asset may
unduly benefit a person that is closely related to the
organization.
◦ Only incidental “private benefit” is permitted. A
private benefit is a non-incidental benefit accruing
to an outside party.
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A charitable class is a group of individuals that
may properly receive assistance from a charitable
organization.
A charitable class must be either large enough
that the potential beneficiaries cannot be
individually identified, or sufficiently indefinite
that the community as a whole, rather than a
pre-selected group of people, benefits when a
charity provides assistance.
The concept of charitable class is another way of
unpacking the public versus private benefit
concept.
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In addition to the prohibition against private
inurement and private benefit, charities may
not
◦ Devote more than an insubstantial part of its
activities to lobbying.
◦ Participate in elections.
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Tax law encourages financial support of
501(c)(3) charitable organizations because of
their public rather than private focus.
Contributions are deductible for income tax
purposes only if made to domestic charitable
organizations.
Charitable deductions are itemized deductions
on an individual’s tax return.
◦ Subject to income limitations:
 50% / 30% / 20% limitations
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Contributions must be properly substantiated.
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Supporting Organizations
◦ SOs obtain public charity status by virtue of their
close relationship with another public charity.
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Donor advised funds
◦ An account held at a public charity over which the
donor retains advisory privileges with respect to
charitable grants from the fund.
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“Friends of” organizations
◦ When properly structured, enable tax deductible
contributions to support the work of foreign
charities.
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Incubation
Bridge (until 501(c)(3) status obtained)
Ongoing sponsorship of charitable program
◦ A charitable activity may not require a new
charitable organization with all of the ongoing legal
and financial compliance responsibilities that come
with a separate legal entity.
◦ Consider partnering with an existing organization
with similar charitable goals.
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Hybrid Organizations
◦ L3Cs
◦ Benefit corporations
 G.L. ch. 156E
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B Corps (a branding tool)
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The IRS: www.irs.gov/charities-&-non-profits
Massachusetts office of the Attorney General
Charities Division:
http://www.mass.gov/ago/doing-business-inmassachusetts/public-charities-or-not-forprofits/
Nonprofit law blog: www.nonprofitlawblog.com
Nonprofit law prof blog:
http://lawprofessors.typepad.com/nonprofit/
ABA Tax-exempt listserve
Guidestar: www.guidestar.org
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November 13
◦ Formation of a charitable organizations
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January 8, 2013
◦ Governance and fiduciary duties
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February 12, 2013
◦ Taxes for the tax-exempts
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March 12, 2013
◦ Dissolution of a non-profit organization
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Year 2: Oct 2013 – March 2014
◦ Focus will be on private foundations
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